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Accounting Fraud

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August 24, 2022

Taronis Technologies, Inc. and related entities have agreed to pay a total of $5.1 million in disgorgement and interest to resolve allegations that the companies issued false and misleading statements claiming to have agreements and relationships with customers that did not exist or were exaggerated.  Taronis executives created fake and backdated orders, resulting in improper revenue recognition.  Based on these misstated financials, defendants raised approximately $30 million from investors in private placements.  SEC

August 16, 2022

Eagle Bancorp, Inc. has agreed to pay $13.35 million in penalties, disgorgement, and interest to resolve charges that it violated SEC regulations and GAAP in failing to disclose as related party transactions nearly $90 million in loans extended to trusts associated with its former CEO and chairman of the board, Ronald D. Paul, as well as tens of millions of dollars of loans to other Eagle directors and their family members.  The SEC further found that when questions about the reporting were raised publicly, the bank knowingly made false and misleading statements that the loans were not related party loans.  Paul agreed to settle related charges for a total of $431,000.  SEC

August 3, 2022

Surgalign Holdings, Inc.—formerly RTI Surgical Holdings, Inc.—and its former executives Brian Hutchison and Robert Jordheim will collectively pay over $2.25 million in civil penalties and disgorgement, for accelerating revenue in contravention of GAAP principles, and in violation of the ’33 Act, the ’34 Act, and SOX. Falling short of their sales targets, RTI shipped future orders ahead of schedule to “pull forward” revenue. This practice cannibalized future revenue streams, damaged important customer relationships, and kept investors in the dark as to the true financial condition of the company. RTI restated its public financial statements from 2014 through 2019 to correct errors caused by this practice. SEC, SEC

July 28, 2022

Jaeson Birnbaum, disbarred attorney and owner of now-bankrupt litigation finance firm, Cash4Cases, will spend 3 years in prison for defrauding investors, in addition to paying over $2.6 million in restitution, and forfeiting another $2.6 million in fraud proceeds. Birnbaum offered sham “Investor Security Agreements,” allowing investors to share in recoveries from lawsuits supposedly purchased by Cash4Cases. Birnbaum netted over $3 million in investors’ funds through his fraud, misappropriated client funds for personal use, and directed his employee to falsify the company’s books and records to show already-paid-out funds as still available to be pledged as collateral to new investors. USAO SDNY

July 14, 2022

Jesus Jose Mendez, co-owner of J&J Drywall, Inc., was sentenced to 3 years probation and ordered to pay $2.8 million to the IRS, and $62,730 to the MA DOL for evading income and employment taxes, and not making the requisite state unemployment contributions. From 2013 to 2017, defendants cashed over $16 million in business checks at check-cashing businesses and would leave cash-filled backpacks at their worksites from which to pay their employees. Meanwhile, deposits into the J&J bank account during this same timeframe equaled only $4 million, and deposits were frequently structured in amounts less than $10k, evading reporting requirements. Federal tax losses are estimated at just over $2.8 million, and the loss to MA DOL equaled nearly $63,000. Jamie Zambrano, Mendez’s business partner, is currently a fugitive. USAO RI

June 28, 2022

In response to SEC charges, audit firm Ernst & Young LLP admitted that its employees cheated on CPA exams and in continuing professional education courses, and that the firm withheld evidence of this misconduct during the SEC’s investigation.  EY agreed to pay a $100 million penalty and undertake extensive remedial measures.  The cheating took place on the ethics component of CPA exams and in courses required to maintain CPA licenses, including ones designed to ensure that accountants can properly evaluate whether clients’ financial statements comply with Generally Accepted Accounting Principles.  SEC

June 28, 2022

Paulette Carpoff will spend over 11 years in prison for her role in DC Solar’s billion-dollar Ponzi scheme. Between 2011 and 2018, DCS manufactured and sold trailer-mounted mobile solar generators, using the available federal solar tax credit to lure investors. In a leaseback arrangement, investors paid a percentage of the cost and financed the rest via DCS. Instead, DCS paid early investors with new investors’ money. Carpoff controlled the Ponzi-like payments, generated fake engineering reports for nonexistent MSGs, and lied to investors about DCS’ success. Carpoff enjoyed the spoils of the fraud, which included over 150 luxury and collector vehicles, lavish jewelry, and a private subscription jet service. USAO EDCA

June 7, 2022

Synchronoss Technologies, Inc. and seven senior employees were charged with accounting improprieties running from 2013 to 2017, including improperly accounting for numerous transactions, filing with the SEC materially misleading financial statements, and having material weaknesses in its internal financial reporting controls. Synchronoss will pay a civil penalty of $12.5 million. SEC

May 23, 2022

Art dealer Inigo Philbrick will spend 7 years in prison and forfeit over $86 million for defrauding investors to finance his art business. Over a 3-year period, from 2016 through 2019, Philbrick misrepresented the ownership of certain artworks, selling multiple ownership interests in an artwork totaling more than 100%; created fraudulent contracts and records to further the scheme; made material misrepresentations and omissions to collectors, investors, and lenders; and sold or used artworks as collateral on loans without the knowledge of the artworks’ co-owners. The fraud was eventually exposed when investors learned of the fraudulent records and material misrepresentations Philbrick had made, and a lender notified Philbrick that he was in default on a $14 million loan. USAO SDNY

April 12, 2022

Robert A. Karmann, a CPA and former CFO of DC Solar, was sentenced to 6 years in prison and ordered to pay $624 million for his role in perpetrating a Ponzi-style scheme, by taking new investor money to pay older investors, and deploying circular transactions to cover up their illicit behavior. DC Solar manufactured trailer-mounted solar generators and marketed them as having extensive third-party lease demand. Karmann and his co-conspirators offered falsified financial statements and operation reports and provided fabricated revenue summaries to victims of the scheme. Karmann oversaw the hidden transfers of funds, gave false information to investor representatives, and instructed a subordinate to “make it up” when asked by a customer for reports on the location of their solar generators. USAO EDCA
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